UnitedHealth ( UNH) is strutting its stuff. The giant health insurer again posted record quarterly results that topped even Wall Street's high expectations. With gains across every business segment, third-quarter profits came in at 64 cents a share, up 23% from a year ago, to beat the consensus estimate by a penny. UnitedHealth's performance, which has been strong for years, sets the stage for expectations about the managed care group as a whole. The company's third-quarter revenue climbed 15% to more than $11.3 billion, roughly in line with analyst forecasts, while net income soared 21% to 842 million. Cash flow jumped an even higher 25% to $1.2 billion. Nearly every other metric -- ranging from operating margins to operating costs to the company's medical cost ratio -- showed improvement as well. Given its solid third-quarter results, UnitedHealth issued full-year earnings guidance of $2.48 a share, a penny ahead of Wall Street expectations. In addition, the company promised to grow earnings by at least 15% to $2.85 next year. The latter news could prove disappointing, however, with analysts looking for guidance of $2.93 instead. Based on his earnings preview this week, Prudential analyst David Shove was hoping for a lot. "We expect UnitedHealth Group to report strong 3Q05 earnings with slight upside to consensus," wrote Shove Wednesday, who has long maintained an overweight rating on the stock. And "we foresee UnitedHealth Group could aggressively raise its 2006 earnings expectations from its current 15% to the mid-25% range ... We believe UnitedHealth Group will sketch a rosy, robust earnings outlook, which will allay investor concerns over the managed care sector's earnings prospects." Shove pointed to a number of opportunities, especially those created by recent acquisitions and expanded Medicare coverage, in explaining his bullish view.
Still, investors seemed nervous on Thursday. They pushed the stock down 1.4% to $54.26 over concerns that UnitedHealth might fail to clear the high bar it always sets.
High HurdlesGiven UnitedHealth's stellar track record, however, Bear Stearns analyst John Rex suggested that he may have set the bar too low. Rex simply expected the company to meet Wall Street estimates with its quarterly results on Friday. "Notably," he said, "our view for 21% earnings growth would represent the first below-30% EPS growth period for the company in 23 consecutive quarters -- leading one to wonder if earnings growth will actually decelerate this meaningfully in a single quarter." Rex pointed to UnitedHealth's swelling share count, rather than any deterioration in business, when explaining that slowdown. Specifically, he explained, UnitedHealth must now generate an extra $20 million in pretax earnings "just to move the needle" up a penny a share. Thus, he said, the company would need a whopping $100 million in excess profits to match its previous growth rate. That, he concluded, is "admittedly a bit much to expect." Nevertheless, analysts still expected plenty. Charles Boorady of Citigroup fully believed that UnitedHealth would meet Wall Street's high growth targets -- and even saw the potential for upside if rising co-payments and deductibles had pushed drug and hospital use lower. Moreover, he accurately predicted that medical costs would continue to drift lower. The company's commercial medical care ratio -- a metric closely watched by investors -- came in at 78%, an improvement over the 78.6% posted both one quarter and one year ago. UnitedHealth also came through on Boorady's projections for enrollment growth. During the third quarter, the company extended service to 500,000 new customers -- including 265,000 in its commercial segment alone.
Looking ahead, Boorady has forecast significant opportunities in both Medicare and consumer-driven health plans as well. Rex, too, has voiced excitement about the company's Medicare business in particular. "UnitedHealth Group's continued broad push into the senior market ... certainly provides an alternative growth avenue, offsetting what could likely be slower traditional commercial insured revenue growth for much of the industry," wrote Rex, who has an outperform rating on the stock. "To the extent that investors care about a top-line growth story, and for that matter bottom-line ... at least for the next couple of years, Medicare could be the single most important contributor." For UnitedHealth, Rex estimated, senior-related business will generate nearly 30% of next year's pro forma revenue -- and that excludes the big boost expected from new Medicare Part D coverage.